A true read on economic hotspots

If you answer that question based solely on what politicians or pundits say, you might well get it wrong. You might think that Sunbelt states consistently outperform Frostbelt states, or that California’s economy is a basket case. And if your media diet is limited enough, you might think that North Carolina’s recent economic performance has been lackluster or even poor.

None of these propositions is supported by the facts.

There are many different ways to measure economic growth. Each has its pros and cons. Some years ago, researchers at the Federal Reserve Bank of Philadelphia came up with a useful way to communicate the available data. They constructed a monthly “Coincident Index” of four measures: the unemployment rate, the number of jobs, average wages and salaries, and the hours worked in manufacturing (which is a proxy for overall hours of employment). The Philly Fed’s index was then adjusted for trends in total state output. Over time, then, changes in each state’s Coincident Index track closely with changes in the state’s gross domestic product.

The result is a useful indicator of economic activity published monthly, just after the statistics come out from the federal government. So which states are experiencing the strongest economic performance? Let’s look first at the year-to-year changes in the index.

From March 2013 to March 2014, the U.S. as a whole posted index growth of about 3 percent. Faster growth rates were found in 21 states, including North Carolina (3.6 percent). The top 10 were North Dakota (6.4 percent), Oregon (5.7 percent), South Carolina (4.9 percent), Maine (4.8 percent), Nevada (4.7 percent), Massachusetts (4.5 percent), Colorado (4.3 percent), Texas (4.2 percent), Indiana (4.2 percent), and Rhode Island (3.9 percent).

A fair objection would be that a single 12-month period isn’t enough of an answer to the question. Some states may have outperformed the nation for years while others are only now making up lost ground from the Great Recession. So I also examined the index trends over three years (since March 2011) and over five years (since March 2009). Expanding the scope of analysis does yield different conclusions.

For example, over the five-year span, Maine, Nevada, Colorado, and Rhode Island drop out of the top 10, to be replaced by Utah, Ohio, Michigan, and California. It’s certainly true, as partisans of the Lone Star State point, that Texas has far surpassed California in job growth and most other economic measures in recent times. But California still performs better than the average state, given its attractive location, physical and human assets, and role in international trade.

Also notice that the economies of Indiana, Ohio, and Michigan are doing relatively well. Plenty of economic potential remains in the country’s industrial heartland, as long as adverse state policies don’t get in the way (see “Illinois, state of.”)

As for North Carolina, our index growth was far worse than the national average from 2009 to 2011. It has exceeded the national average since 2011. Some critics question the relevance of standard measures to describe North Carolina’s economy given a large, unexpected drop in labor-force participation that began in early 2013. But they overstate their case.

The U.S. Bureau of Labor Statistics computes a measure of labor utilization that includes people who have dropped out of the labor force. It’s called the U-5 unemployment rate. North Carolina’s U-5 rate averaged 9.3 percent during 2013, significantly higher than the familiar U-3 unemployment rate, which averaged 7. 9 percent. But that’s true in every state. From 2011 to 2013, North Carolina’s U-5 rate dropped 2.5 percentage points — one of the largest declines in the country. In other words, even if you account for people dropping out of the labor force, North Carolina’s labor market has improved faster than those of most other states.

Why are some states doing better than others? That’s a fascinating debate for another day. The place to start, however, is with a clear understanding of which states are, in fact, doing better.

John Hood is president of the John Locke Foundation.

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